Accounting - Enter the global watchdog

Fear over the risk of financial reporting failures in the world’s securities markets is driving the prospect of a global watchdog. The US Securities and Exchange Commission (SEC) and the Committee of European Securities Regulators (CESR) have recently declared their intention to get down to some serious courtship.

Talks sprang primarily from the desire to see if they are identifying similar emerging risks, and then to see if they can come up with similar solutions. One of the top items on the agenda is the introduction of international financial reporting standards.

The SEC-CESR intends to hold discussions over the next 18 months on the “development of an effective infrastructure to support the use of IFRS; in particular, with respect to consistent application, interpretation and enforcement of these standards with the final objective of avoiding reconciliation with local generally accepted accounting principles.”

The US originally stood aloof from the international convergence programme. Now that the US regulator can see how near Europe is to working with international GAAP, it has decided to move more decisively towards the same position, even if the accounting standards still carry the US label to soothe fears and political sentiment in the US. This would be a considerable achievement, but not as impossible as it seemed in 2001, when the International Accounting Standards Board cranked into life.

A key point for SEC-CESR is that the US Financial Accounting Standards Board and IASB have their own official convergence project. Equally importantly, they also ensure that the interpretations they put out (the work we think of as belonging to the UK’s now moribund Urgent Issues Task Force) is pointing in the same direction.

But when SEC-CESR is talking about the development of an “effective infrastructure” and promises “consistent application, interpretation and enforcement” it has in mind more than the work of accounting standards setters.

Perhaps surprisingly the word ‘audit’ is not to be found anywhere in the statement. Accounting standards are not the biggest headache for securities regulators. Rather, the quality of audit, audit standards and the regulation of auditors are among the biggest concerns on both sides of the Atlantic. Post-Enron and Parmalat, a shakeup of the regulation of the auditing profession is happening in both the US and Europe. At the same time, the self-regulated auditing profession has announced it is going to move to international auditing standards. In truth, the change in auditing standard and practice is a matter mainly for the auditors themselves, although as a result of this internationalisation auditors are likely to ask some more awkward questions of their clients (mostly the FD) and will probably try to put in a bigger bill.

One of the key issues for SEC-CESR and auditors is proving that standards of audit are of good quality. In Europe and the US, this problem is addressed through corporate governance codes and through other legislative changes. For instance, in Europe the 8th Directive is being revised, mostly away from the glare of the spotlight, with auditors muttering that proposed revisions are too onerous in terms of oversight of the profession, quality assurance and education. Auditors insist they are doing good work but they still have a job proving it.

Of course a single, global securities regulator is not going to happen for a number of years, if at all. However, while the idea of a US/European regulator may make technical sense and lead to better regulation of global securities markets, it does not mean it would necessarily be acceptable politically. While most people would be unmoved if SEC-CESR announced a merger, the regulators have to take account of the political climate that we have seen demonstrated in the European elections, where there are votes in saying no to further integration and closer co-operation across borders.

Commenting on the collaboration, CESR chairman Arthur Docters van Leeuwen said: “The final results of this transatlantic dialogue, and indeed the outcome of a widening of US and EU markets, cannot be predetermined today, nor, I hasten to add, should it be.”

While the regulators may be hedging on the politics, they are clear on one objective. They want to create quality in a globally integrated market, and they expect accounting and auditing standards setters, auditors and FDs to be on their side as that process happens. l